Priceline.com Inc.

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St. John’s University Undergraduate Student Managed Investment Fund

Presents:

Priceline.com Inc.

Analysts:

Nikos Nicolaou ([email protected]) Yanling Zhu ([email protected]) John Kenny ([email protected])

Christian Kelly ([email protected]) *Recommendation: Purchase 15 Shares @ $700

Company Data (as of 05/02/2012) Price: $761.06 Beta (10 Year Adj): 1.508 52 Week Range: 411.26 - 774.96 Market Capitalization: $37,894,700,000.00 Shares Outstanding: 50 Million Dividend Yield: 0.0%

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Contents I. Executive Summary ................................................................................................................................... 2

II- Company Overview ................................................................................................................................... 3

III. Industry Analysis ..................................................................................................................................... 9

IV. Fundamental Analysis ............................................................................................................................ 14

V. Pro Forma Income Statement ................................................................................................................. 31

VI. Relative Valuation .................................................................................................................................. 37

VII. Absolute Valuation ............................................................................................................................... 40

VIII. Risk Factors .......................................................................................................................................... 43

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I. Executive Summary Priceline is a growing travel booking retail Internet Company that operates around the world. Around 60% of its sales come internationally while the other 40% is domestic. Based on our qualitative research, Priceline is a company that is considered to grow and possibly reach the $1000 mark in price per share1. Its revenues, EBIT and Net Income have shown growth over the last ten years. Our fundamental analysis shows that Priceline has either matched or beaten its competitors in Profitability, Liquidity, Leverage, and Efficiency. The trend in the last ten years from 2002 to 2011 within each category suggests that Priceline is dominating its industry. Our Pro Forma Income sheet forecast projects Priceline to reach a near three percent increase in market share for the next two years, giving it strong annual revenues. Our relative valuation shows the stock price of Priceline to be slightly overvalued. The adjustment factors for each competitor became a problem because there was missing data and not a strong trend in the movements of the forward P/Es. Therefore our decision was to weight our relative valuation slightly less than our other valuation models. Our absolute valuation shows generally positive intrinsic value potential under rather modest growth assumptions. The absolute valuation had given us enough of a positive outlook to finally secure our recommendation. From our analysis we found the stock to be fairly valued but found the company to have strong structure in its operations and a growth company that has not matured. Due to its strong growth potential we recommend a buy of 15 shares for targeted purchasing price of $700.

Recommendation: BUY 15 Shares @ LIMIT price of $700

1 http://www.theflyonthewall.com/permalinks/entry.php/PCLNid1602382/PCLN-Pricelinecom-rises-after-Piper-says-stock-can-reach--in-

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II- Company Overview Description Priceline.com Inc. is a company whose focus is on offering consumers a transactional service for the purchase of leisure travel expenditures such as flights, cruises, hotels, rental cars, vacation packages, destination services, and travel insurance. Priceline’s headquarters are located at 800 Connecticut Avenue, Norwalk, Connecticut. The company trades on the Nasdaq Global Select Market under the ticker symbol PCLN. The group of companies in which Priceline is comprised of (Priceline.com, Booking.com, Agoda.com, and Traveljigsaw.com) employs about 3,400 workers in aggregate. Priceline.com was incorporated in the state of Delaware on July 30, 1998. Priceline was founded by Jay Walker in 1997 and launched its business on the Internet on April 6, 1998. It went public on March 29, 1999 at 16 dollars a share and just one month following its IPO its stock had grown to 165 dollars per share. Currently the stock price as of this month (April 2012) has been hovering around 700 dollars a share. The Chief Executive Officer (CEO) is Jeffery Boyd. The mission of the company is as follows: “To be the leading on-line travel business for value-conscious leisure travelers in North America”2. A key element to Priceline’s success has been its successful integration of its Name Your Own Price strategy matching what consumers are willing to spend most closely with what vendors are willing to sell. Revenues Geographic Operations Priceline.com is just one subsidiary of the Priceline Group which is composed of four subsidiary companies. These four companies are Priceline.com, Booking.com, Agoda.com, and Traveljigsaw.com. Together the Priceline Group provides online travel services through vacation deals, flights, and car hire throughout various regions of the world. These regions include Europe, North America, South America, the Asia-Pacific, the Middle East, and Africa. Priceline international and domestic operation channels are described as follows: International: Price-Disclosed Hotel Reservation Services- a hotel reservation service that displays set prices as interpreted by the hotel market mainly through Booking.com (worldwide offices) and priceline.com Mauritius Company Ltd. (formerly Agoda.com) with primary operations in Asia. International: Price-Disclosed Rental Car Reservation Services- a rental car reservation service based in Manchester, U.K. with prices displayed as interpreted by the market for rental cars through rentalcars.com acquired in May 2010. United States: Name Your Own Price® Travel Services- System allowing consumers to pay what they can for satisfactory travel service that allows sellers to fill in voids without disrupting travel schedules and retail travel prices. The system is a mutual benefit to consumers and sellers alike. United States: Retail Travel Services-uses a retail based pricing strategy for the selling of travel services

2 "SEC Info - Priceline Com Inc - 8-K - For 12/5/07 - EX-99.1." SEC Info - the best EDGAR online

database of Securities and Exchange Commission filings & IPOs. N.p., n.d. Web. 22 Apr. 2012. <http://www.secinfo.com/d11MXs.u2KSy.d.htm>

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such as hotel rooms, rental cars, airline tickets, vacation packages, destination services and cruises. A detailed description of the Priceline Group as displayed by the company website (Priceline.com): “Booking.com is a leading international online hotel reservation service operating in 101 countries in 41 languages. Booking.com offers its customers access to over 135,000 participating hotels worldwide. Priceline.com gives leisure travelers multiple ways to save on their airline tickets, hotel rooms, rental cars, vacation packages and cruises. In addition to getting compelling published prices, travelers can take advantage of Priceline’s famous Name Your Own Price® service, which can deliver the lowest prices available. Agoda.com is an Asia-based online hotel reservation service that offers hotel rooms around the world and is available in 32 languages. TravelJigsaw is a multinational car hire service, offering its reservation services in more than 4,000 locations in 115 countries. Customer support is provided in 27 languages”3. Chart by FactSet: Geographic Segmentation

4 Business Segments: Agency Profit -Consists of (1) travel commissions; (2) customer processing fees; and (3) GDS reservation booking fees related to certain of the agency services. Merchant Profit -“Merchant gross profit is derived from transactions where we are the merchant of record and therefore charge the customer’s credit card for the travel services provided, and consisted of: (1) transaction gross profit representing revenue charged to a customer, less the cost of revenue amount charged by suppliers in connection with the reservations provided through our Name Your Own Price® hotel room reservation, rental car and airline ticket services, as well as through our price-disclosed vacation packages services; (2) transaction gross profit representing the amount charged to a customer, less the amount charged by suppliers in connection with our merchant price-disclosed services; (3) customer processing fees

3 "Investor Relations | priceline.com."Investor Relations | priceline.com. N.p., n.d. Web. 21 Apr. 2012.

<http://ir.priceline.com/> 4 FactSet Chart

Dec-11Dec-10Dec-09Dec-08Dec-07Dec-06Dec-05Dec-04Dec-03Dec-020

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

40.4%53.2%

63.6%67.1%

73.6%83.7%92.7%98.5%100.0%100.0%

37.6%

29.7%

23.9%

21.6%

17.2%10.5%

16.3%

13.6%

12.6%

11.3%

4,355.6

3,084.9

2,338.2

1,884.8

1,409.41,123.1

962.7914.4863.71,003.6

United States The Netherlands United Kingdom Rest of the World

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charged in connection with the sale of our Name Your Own Price® airline tickets, hotel room reservations and rental cars and our merchant price disclosed services; and (4) ancillary fees, including GDS reservation booking fees related to certain of the services listed above. Other revenues are derived primarily from advertising on our websites”5. Other Profit -The other profit portion derives from the selling of advertisement space on websites. Product Segmentation -Airline tickets -Vacation packages -Destination Services -Cruises -Travel Services Gross Profit Sources

“Commissions earned from price-disclosed hotel room reservations, rental cars, cruises and other travel

services;

Transaction gross profit and customer processing fees from our Name Your Own Price® hotel room

reservations, rental car and airline ticket services, as well as our vacation packages service;

Transaction gross profit and customer processing fees from our price-disclosed merchant hotel room

and rental car reservation services;

Global distribution system (GDS) reservation booking fees related to both our Name Your Own Price®

airline ticket, hotel room reservation and rental car services, and price-disclosed airline tickets and

rental car services;

Other gross profit derived primarily from selling advertising on our websites”6.

Corporate Structure of the Firm

Listed below is the key executives of the firm and their personal descriptions extracted from the

company website (Priceline.com):

5 priceline.com Incorporated - Annual Report." Investor Relations | priceline.com. N.p., n.d. Web. 25 Apr. 2012. <http://ir.priceline.com/secfiling.cfm?filingID=1075531-12-5&CIK=1075531

6 "priceline.com Incorporated - Annual Report." Investor Relations | priceline.com. N.p., n.d. Web. 25

Apr. 2012. <http://ir.priceline.com/secfiling.cfm?filingID=1075531-12-5&CIK=1075531>

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Executives

a) Jeffery H. Boyd, President and Chief Executive Officer “Jeffery H. Boyd has served as a Director of priceline.com since October 2001. Mr. Boyd has been President of priceline.com since May 2001 and Chief Executive Officer since November 2002. Mr. Boyd was President and Co-Chief Executive Officer from August 2002 to November 2002 and Chief Operating Officer from November 2000 to August 2002. He previously served as Executive Vice President, General Counsel and Secretary of priceline.com from January 2000 to October 2000. Prior to joining priceline.com, Mr. Boyd was Executive Vice President, General Counsel and Secretary of Oxford Health Plans, Inc. Mr. Boyd is a member of the board of directors for Bankrate, Inc. and BEN Holdings, Inc. (the holding company for Bankrate, Inc.). Mr. Boyd is also a member of the priceline.com Group Management Board.” b) Adrian Currie, Chairman, Agoda and Managing Director, Asia-Pacific, Booking.com “Adrian Currie has been Managing Director, Asia-Pacific since January 2012 and has been Chairman of Agoda since 2007. Previously, Mr. Currie was Managing Director (Australia & New Zealand) of Booking.com from 2008 to 2011 and served as the Chief Financial Officer of Booking.com from 2005 until 2010. Mr. Currie, a chartered accountant, previously worked for Ernst & Young for twelve years in corporate finance and audit roles. Mr. Currie is also a member of the priceline.com Group Management Board.” c) Daniel J. Finnegan, Chief Financial Officer and Chief Accounting Officer “Daniel J. Finnegan is Senior Vice President, Chief Financial Officer and Chief Accounting Officer of priceline.com. Mr. Finnegan has been Chief Financial Officer since January 2009. Mr. Finnegan was the Company's Senior Vice President, Controller and Chief Accounting Officer from October 2005 to January 2009. Mr. Finnegan joined priceline.com in April 2004 as Vice President and Chief Compliance Officer. Prior to joining priceline.com, Mr. Finnegan served as Chief Financial Officer for CS Technology, Inc., a consulting company, from October 2000 to April 2004. Mr. Finnegan is also an ex-officio member of the priceline.com Group Management Board.” d) Glenn D. Fogel, Head of Worldwide Strategy & Planning; Executive Vice President - Corporate Development “Glenn D. Fogel is priceline.com's Head of Worldwide Strategy and Planning. He is also Executive Vice President Corporate Development, and is responsible for the company's worldwide mergers, acquisitions and strategic alliances. He is a member of the board of directors of priceline.com's international subsidiaries, Booking.com, Agoda and TravelJigsaw. Mr. Fogel joined priceline.com in February 2000. Prior to joining priceline.com, he was a trader at a global asset management firm and prior to that was an investment banker specializing in the air transportation industry. Mr. Fogel is a member of the New York State Bar (retired). Mr. Fogel is also a member of the priceline.com Group Management Board.” e) Darren Huston, Chief Executive Officer, Booking.com B.V. “Darren Huston was named Chief Executive Officer of Booking.com in September 2011. Prior to joining Booking.com, Mr. Huston served as the Corporate Vice President, Consumer & Online for Microsoft Corporation, a position he held since 2008. From 2005 to 2008, he served as President and Chief Executive Officer of Microsoft Japan. Prior to joining Microsoft in 2003, he was a Senior Vice President at Starbucks Corporation, responsible for acquisitions and new product development. Mr. Huston has also

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served as an executive with McKinsey & Company, and as an economic advisor to the Government of Canada. Mr. Huston is also a member of the priceline.com Group Management Board.” f) Peter J. Millones, Jr., Executive Vice President and General Counsel “Peter J. Millones, Jr. is Executive Vice President, General Counsel and Corporate Secretary of priceline.com. Mr. Millones has been General Counsel and Corporate Secretary of priceline.com since January 2001. He previously served as Vice President and Associate General Counsel of priceline.com from March 2000 to January 2001. Since 2003, Mr. Millones has been responsible for priceline.com's U.S. human resources department. Prior to joining priceline.com, Mr. Millones was with the law firm of Latham & Watkins. Mr. Millones is also an ex-officio member of the priceline.com Group Management Board.” g) Christopher L. Soder, Chief Executive Officer, North American Travel “Christopher L. Soder was promoted to CEO, North American travel in June 2011. Chris was President, North American Travel since February 2007. Mr. Soder was Executive Vice President, Travel Services from March 2005 to February 2007 and had been Executive Vice President, Lodging and Vacation Products from July 2002 to March 2005. From February 2000 to July 2002, Mr. Soder was President of priceline.com's hotel service. Prior to joining priceline.com, Mr. Soder was Western Region Vice President, Business Markets, for AT&T. Mr. Soder is also a member of the priceline.com Group Management Board.” h) Matthew N. Tynan, Senior Vice President, Finance “Matthew Tynan was promoted to Senior Vice President, Finance, in December 2008. He joined priceline.com in 2000 as Business Analyst. In 2001, he was promoted to Director, Financial Planning & Strategy. In 2003, he was promoted to Vice President, Planning, Strategy & Analysis. Before joining priceline.com, he was a Financial Analyst with Bear, Stearns & Co., Inc.” Recent News

In recent events the Priceline.com group has found a new trend in “smartphone” usage for booking reservations for services provided by it. This trend has been from a group of tech savvy consumers willing to make reservations last minute before the departure of their travels. In viewing this trend Priceline has set out to exploit it. One article states “its "Booking.com Tonight" app which targets last-minute hotel decisions, promising discounts of up to 50 percent wherever you are in the world…For car rentals, it reports 41 percent of its bookings are now same-day, with 48 percent of those within two hours of

pickup. One article states “The company's earnings-per-share growth over the past five years was an impressive 65% (59% by our calculations)… but to sustain that momentum going forward…Strong international growth, primarily driven by increased hotel bookings in Europe, should continue to boost revenue for the company”7. Priceline still has room left to run in emerging markets like Asia and Latin America and plans to exploit this opportunity. As it states in its most recent 10K form “Our growth has primarily been generated by our international hotel reservation service brands, Booking.com and Agoda. Booking.com, our most significant brand, currently includes over 185,000 hotels and accommodations on its website as compared to about 120,000 hotels and accommodations last year (updated hotel

7 "Are Shares of priceline.com Overpriced? - DailyFinance." Saving. Spending. Investing. Planning.

Everything you need for a lifetime of financial decisions. -- DailyFinance. N.p., n.d. Web. 30 Apr. 2012. <http://www.dailyfinance.com/2012/04/23/are-shares-of-pricelinecom-overpriced/>

http://itunes.apple.com/gb/app/booking.com-tonight/id516563800?mt=8

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counts are available on the Booking.com website). Booking.com has added hotels over the past year in its core European market as well as higher-growth markets such as North America (which is a newer market for Booking.com), Asia-Pacific and South America”8. The following revenues, profits, as well as growth percentages were derived from the Priceline 2011 fourth quarter earnings report: The fourth quarter 2011 revenues from international operations made up 61.5% of total revenues. These international revenues valued at 610 million dollars. Total revenues for the quarter were 991 million dollars. There has been strong growth in revenues as well as profits over the prior year. The Priceline Group had a 51.5% increase in gross profit and 35.5% increase in revenues over the past year. International contributions to revenues have been 62.7% over the past year. We can see that much of growth can be allocated to international expansion. This is a good indication that Priceline is in good positioning already to take a first mover advantage to international expansion. The first quarter 2012 revenues are to be announced on May 9th.

One occurrence worth mentioning was an issuing of notes by Priceline through investment bank

Goldman Sachs. The interesting fact is that these notes are convertible to common stock. The notes are

described in the following excerpt:

“Priceline announced on March 7, 2012 a pricing of an $875 million principal amount of

Convertible Senior Notes due 2018. These senior notes are only available through a private

offering to qualified institutional buyers. The notes will pay a semiannual interest at a rate of

1.0%. These convertible senior notes may be converted at a conversion rate of 1.0586 shares of

common stock per $1000 of notes which is equivalent to $944.61 per share representing a

conversion premium of around 50%. The proceeds of this offering is said to repurchase

approximately $166 million of its outstanding common stock among private investors and may

include repurchasing shares of open market common stock. Remaining proceeds may also

provide Priceline with capital to repay its limited amount of outstanding debt or make additional

corporate acquisitions”9.

Although, these convertible notes are to be sold to private institutional investors we can only hope that

Goldman sees value in these notes and this company and plans to hold some for the personal

investment of the bank but this cannot be inferred as fact.

8 "priceline.com Incorporated - Annual Report." Investor Relations | priceline.com. N.p., n.d. Web. 25 Apr.

2012. <http://ir.priceline.com/secfiling.cfm?filingID=1075531-12-5&CIK=1075531>

9 "StreetInsider.com."StreetInsider.com. N.p., n.d. Web. 3 May 2012.

<http://www.streetinsider.com/Corporate+News/Priceline.com+%28PCLN%29+Prices+$875M+Convertible+Notes+Offering%3B+Will>.

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III. Industry Analysis Industry Overview

Business Services Industry:

Priceline participates in the Business Services industry and more particularly the internet retail

segment of it. It is highly dependent on the success of the travel industries and factors which affect

travel. The United States and European market are at the end of their growth stages. Still, many

companies in the industry have their eyes on emerging markets in Asia and Latin America. These

emerging markets are still at the start of the computer technology era yet among them are large

amounts of travel transactions. “Among the four regions studied, the U.S. and Europe represent more

than three fourths of all online sales, but less than two thirds of total travel sales… As online travel

bookings in the emerging markets of Asia Pacific and Latin America accelerate, combined share for

Europe and the U.S. will fall to 73% in 2012 and continue to decline thereafter”10 For this reason,

although industry growth may slow in the U.S. and Europe the potential in emerging economies remains

abundant and could prove to be profitable for major companies within the industry. “By the end of

2012, travelers will book one third of the world's travel sales online, according to a new PhoCusWright

report… Online leisure/unmanaged business travel bookings will grow twice as fast as the total market,

to surpass US$313 billion by 2012”11. The industry life cycle is in the maturity phase in the developed

economy but just entering the introduction stage of undeveloped ones which may be a great asset to

companies ready to take advantage.

Factors Affecting Industry:

There are many factors that affect the business services industry. This is due to the industry’s

close correlation and fierce direct impact from the global economy. Market conditions such as extreme

price and volume volatility of internet company stocks in this industry is a factor investors should

consider. Political risks factor into the industry’s success such as war between countries. Economic risks

that may cause disruption which companies have no control of are interest rate fluctuation as well as

currency rate fluctuations. Many countries in Europe are facing debt problems for example and the

devaluation of currencies could affect revenue streams for many companies in this industry. Natural

disaster occurrence can be a prevalent factor for the industry as it affects travel which in turn affects

business services such as online booking sites. A recent example of this has been the tsunami and

10 2012, the end of, and travelers will book one third of the world's travel sales online. "Global Online Booking Soars | Travel

Research - Industry Events - PhoCusWright Conference."Global Travel Market Research Company - PhoCusWright - Tourism Hospitality Industry Reports and Conferences | Travel Research - Industry Events - PhoCusWright Conference. N.p., n.d. Web. 3 May 2012. <http://www.phocuswright.com/research_updates/global-online-booking-soars>.

11 2012, the end of, and travelers will book one third of the world's travel sales online. "Global Online Booking Soars | Travel

Research - Industry Events - PhoCusWright Conference."Global Travel Market Research Company - PhoCusWright - Tourism Hospitality Industry Reports and Conferences | Travel Research - Industry Events - PhoCusWright Conference. N.p., n.d. Web. 3 May 2012. <http://www.phocuswright.com/research_updates/global-online-booking-soars>.

http://www.phocuswright.com/products/2716

http://www.phocuswright.com/products/2716

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earthquake hitting Japan in 2011 causing catastrophe as well as nuclear emergency and the disruption

of many industries alike.

Industry Growth:

Priceline.com is still in the growth phase of the product life cycle. Even though the company has

grown exponentially already, there still remains room for expansion into foreign markets. This should

yield higher profit in the future and a continuation of successful company growth of sales and profits.

The market for internet retail seems to have a promising future. Also, as the overall economy improves,

so will the travel industry with which Priceline is directly correlated]. The outlook we hold for the

internet retail sub industry is optimistic. Macroeconomic indicators show signs of stable economic

recovery yielding greater amounts of electronic commerce. “S&P estimates the unemployment rate will

average 8.2% for 2012 after averaging 8.9% in 2011”. Factors such as personal spending, a lower

unemployment rate, and a slight increase in wage growth all support growth in the industry. Banks have

increased their lending slowly and this should help spending in the short term as well. A decline in the

savings rate is a sign that tells us that people are becoming more confident in the economy. “S&P notes

that personal spending increased only 2.0% in 2010 and just 2.2% growth in 2011…S&P Economics

projects an additional 2.0% increase for 2012”. The idea is that if people are going to spend at this point

in time then online merchants will be an attractive option for that. This is because online merchants

offer a convenient way to shop from home, a greater amount of options for products, and an easy way

for consumers to compare prices and conduct research on the items they need. Also, in an ever

improving age of technology more consumers have become comfortable with online purchasing as for

many it has become easier and safer as far as receiving products and protection of wealth. Projections

by Forrester Research show “U.S. e-commerce sales will increase from an estimated $197 billion in 2011

to $279 billion in 2015”. This is another favorable projection that would support our case.

Since Priceline is directly correlated with the key elements of vacation packages we looked into the

Hotels, Resorts, and Cruise lines Sub Industry as well. We found some decent improvement in this area

which aligns with our assumptions and supports our expectations for the future success of Priceline.

Considering the slow growth that the economy has witnessed since 2009 the industry has shown

improvements and we expect this trend to continue as the economy moves in a similar direction. Some

statistics extracted from the S&P industry outlook:

1. “hotel room pricing and occupancy statistics have improved and rose 3.7% and 4.4%,

respectively, in 2011”

2. “In 2010, hotel room demand is estimated to have rebounded 7.7% after declining 6.0% in 2009,

according to Smith Travel Research”

3. “We estimate business demand, including both transient and group travel, picked up 7% to 9%

after falling about 12% in 2009”

4. “Year to date through March 23, the S&P Hotels, Resorts & Cruise Lines Index rose 13.5%, versus

an 11.2% advance in the S&P 1500 Index”

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Upon seeing these statistics we can infer that as the economy has been improving and so has this sub

industry. Although the improvements are modest we expect them to continue. The logic here is that

since we expect the economy to move along in a similar fashion over the next few years we would

expect the industry to act closely similar to how it has been. This would be favorable for Priceline’s US

operations.

Analysis of Competitive Forces Similar to any other company, Priceline faces vast competition. The business services industry

portrays this for the fact that the industry has become a consolidated one. A consolidated industry is one in which the market share is mainly dominated by a few big players in the market. The broad spectrum of competition Priceline faces are from internet travel services, travel suppliers, (large online portal, social networking, group buying and search companies), traditional travel agencies, online travel search sites, and operators of travel industry reservation databases.

Rivalry- High

Priceline works hard to establish and uphold its brand awareness in each of its respective

operating regions. This is important to the success of the company because if people do not think of

their brand first then Priceline does not get the business. This is why the Priceline group tailors its

services in each region to the needs to serve best the people of that region. Priceline realized that value

conscious consumers are in the U.S. while the European consumers prefer greater variety of options.

Each of the travel booking websites markets the same service resulting in rivalry amongst them. It is

hard for them to take a differentiation approach focused on quality because the booking sites can only

promise the quality of the companies whom they work closely with. Therefore they must compete with

the lowest pricing which inevitably causes rivalry amongst an industry. Of course, website functionality

plays an important role in the collection of bookings and thus allocation of market share to each travel

booking site. “Web sites are incredibly critical to an airline's survival, because financially, the cost of a

sale through a Web site is generally much lower said Henry Harteveldt, an analyst at Forrester Research

Inc”12.

Threat of New Entrants – Medium

The threat of new entrants into this type of industry is unlikely although Priceline may still worry

about hotel and various other partners cutting them out of the equation. Rather than partner with the

services of sites like Priceline, Hotels are beginning to efficiently market their personal booking websites

and may soon require little of travel booking site services. Still, Priceline is a giant company with an

increasing market share as well as an enormous volume of customers which it services daily. “In 2008,

Priceline only had 32% of total operating-profit share in the industry or $289 million in total… By 2010,

Priceline dominated market share with 53% or $787 million”13 Although demand for Priceline’s booking

12 Thibodeau, Patrick. "Frontier Hopes Solaris Upgrade Boosts Web Bookings.." computerworld 40.27 (2006): 18-18. Print.

13 Morais, Richard C.. "Priceline to Continue Gaining Market Share - Barrons.com." Financial Investment News - Stock Investing

News - Investment News - Barrons.com. N.p., n.d. Web. 2 May 2012.

<http://online.barrons.com/article/SB50001424053111904486504576440322047898418.html>.

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service remains unlikely to diminish in the immediate future, it is something the company may have to

address down the road and they will have to figure out a new way to make their presence needed. Also,

search engines such as Google as well as Bing have been servicing deals on travel searches thereby

limiting needs of online travel agents.

Threat of Substitute Products- Low

It is unlikely to substitute a travel booking service with another service or product.

Bargaining Power of Suppliers- High

The bargaining power of Priceline’s suppliers is something Priceline should make note of in

assessing its future competition. Priceline at one point in its early years took on a great amount of debt

before becoming profitable because they bought booking reservations for higher prices than they were

selling them just to gain market share when the company was first beginning. This is not something a

company can afford to do continually. If Priceline’s suppliers began to increase prices then Priceline

would not be able to compete with its pricing in such a price competitive industry. Also, if Priceline

services become less useful to certain partners then over time there may be less incentive for suppliers

to work efficiently with the Priceline business model. Still Priceline holds great value in the eyes of

consumers and thus suppliers will continue to work with the Priceline group until that result changes.

Bargaining Power of Buyers-High

For Priceline, its buyers are not commonly businesses but more commonly the everyday average

traveler. Priceline margins on products are small but fortunately there are a lot of people who travel

today and Priceline strives to grab a large portion of the market share from that group. This being the

case, Priceline can only charge what the consumers are willing to spend. Any price above that and

Priceline will immediately begin to lose market share. Therefore, in aggregate the consumers do have a

say from the microeconomic standpoint of supply and demand.

Analysis of Strategies:

One of the most important strategies that Priceline employs is its multi-domestic strategy. A

multi-domestic strategy is one in which a company offers a specific element to its product or service that

is dependent on the region within which it operates. Priceline employs its Name Your Own Price pricing

tactic to attain a larger market share in the US through value conscious consumers. But its offerings in its

European region differ in that they focus more on the retail pricing tactic and strive to offer a lot of

variety in travel options. Wherever Priceline operates it implements a strategy that differentiates in

some way from the rest while offering something more to the specific region in which it operates.

The pricing strategy Priceline offers is worth mentioning as well. The combination of the Name

Your Own Price tactic and the retail pricing tactic is part of a larger pricing strategy. This strategy allows

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Priceline to derive value and revenue from a more diverse group of consumers thus allowing for greater

market share, brand awareness, and ultimately profits. By employing these two tactics Priceline finds

value in the form of revenues from a group that it labels “value conscious consumers” as well as the

original internet retail consumer. By offering a more opaque service one can pay more cheaply if they

are willing to sacrifice the comfort of knowing the exact logistics of their travel plans. But some would

rather pay the extra price to travel with the knowledge of exactly how they will get somewhere and

every point they will stop in between. This is a key element to the formula of success for Priceline as it

has been a unique concept to their company thus far.

Priceline’s company management has been efficient over the past ten years. Priceline has

brought striking returns to stock holders over the past ten years and this has been the result of

innovative leadership by the management of the firm. The firm’s ability to overcome obstacles and

thrive under the duress of economic hardship has been a great accomplishment. All of these reasons in

conjunction are most likely the reason for Jeffery Boyd’s placement in Barron’s list of best CEO’s for

2012. Priceline’s success thus far is evidence of a well managed company.

P a g e | 14

IV. Fundamental Analysis Pirceline.com has been compared to one “custom industry” group which consisted of two types of

competitors, one being the more similar online travel-booking companies including Expedia, Orbitz,

Travelzoo and TripAdvisor, the other is companies in the travel industry including Marriot and Hertz, and

has been evaluated using different performance indicators which are detailed below. Marriot, Hertz and

TripAdvisor are included in the Income/Cash flow analysis as individual competitors, but only as part of

the industry average in the key ratios analysis.

1. Income/Cash Flow a. Sales Growth

Priceline’s revenue has been increasing at a steadily accelerating rate, especially during the last

three years. It surpassed its biggest rival Expedia in 2010, which is also reflected in its market

share surpassing Expedia that year (market share: PCLN 11.47% and EXPE 11.28%) and emerging

as the largest player in online travel-booking market. This is attributable to its acquisition of

Traveljigsaw, a multinational car hire service in May 2010. Priceline’s average annual growth

over the last 5 years has been a remarkable 31.14%, well above its main competitors and

industry average (4.341%). In fact, looking at the five and ten-year horizon, it is the only

company whose average annual sales growth has increased in the last five years, almost

doubled, while all the others slowed down due to the hit by the financial crisis (except

TripAdvisor whose data only dates back to 2008).

Note: Priceline’s sales is lower than that of Marriot and Hertz, who are also bringing up the

industry average, because these two companies have physical assets and different operations.)

P a g e | 15

Sales Growth 2003 2004 2005 2006 2007 2008 2009 2010 2011 2002-2011 2006-2011

Priceline -13.944% 5.872% 5.281% 16.667% 25.492% 33.730% 24.056% 31.934% 41.191% 17.715% 31.137%

Expedia Inc. 56.084% -21.232% 14.999% 5.574% 19.116% 10.193% 0.627% 2.647% 13.692% 9.700% 9.039%

Orbitz Worldwide Inc. 37.793% 0.893% 181.148% 9.621% 14.229% 1.281% -15.172% 2.641% 1.232% 17.803% 0.391%

Travelzoo Inc. Inc. 82.693% 87.198% 50.752% 36.935% 13.500% 2.415% 16.279% 20.017% 31.528% 35.170% 16.366%

Industry Avg 66.992% 7.599% 15.286% 6.119% 10.120% 2.948% -10.874% 9.147% 12.142% 11.753% 4.341%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Priceline 1,003.60 863.661 914.372 962.660 1,123.10 1,409.40 1,884.80 2,338.21 3,084.90 4,355.61

Travel Zoo 9.848 17.991 33.679 50.772 69.525 78.911 80.817 93.973 112.784 148.342

Marriot International, Inc 8,337.00 9,014.00 10,099.0 11,550.0 11,995.0 12,990.0 12,879.0 10,908.0 11,691.0 12,317.0

Expedia 1,499.07 2,339.81 1,843.01 2,119.45 2,237.58 2,665.33 2,937.01 2,955.42 3,033.64 3,449.00

Hertz Global Holdings, Inc 5,933.67 6,675.95 7,469.21 8,058.40 8,685.63 8,525.05 7,101.50 7,562.53 8,298.38

TripAdvisor, Inc. 298.246 352.089 484.635 637.063

Orbitz, Inc. 175.510 241.840 244.000 686.000 752.000 859.000 870.000 738.000 757.487 766.819

Industry Average 2,205.00 3,068.49 3,301.66 3,806.35 4,039.27 4,448.04 3,924.99 3,498.17 3,818.14 4,281.74

0.000

2,000.000

4,000.000

6,000.000

8,000.000

10,000.000

12,000.000

14,000.000

Do

llars

(in

mill

ion

s)Sales

P a g e | 16

b. EBIT Priceline’s EBIT shows a similar pattern to its sales: relatively smooth increase in the first several

years of the ten year period, and sharp increase since 2007 as can be seen from the steep slope,

after it acquired Agoda.com, which is an Asia-based online hotel reservation service. It

surpassed Expedia in 2010, and last five-year annual average growth (86.428%) is also well

above all others.

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Priceline 4.388 14.470 30.410 37.548 62.121 193.285 289.474 470.835 786.797 1,398.92

Travel Zoo 1.476 3.739 11.033 14.870 29.753 20.624 13.312 13.708 23.512 35.022

Marriot International, Inc 519.000 370.000 477.000 667.000 1,087.00 1,188.00 840.000 613.000 904.000 635.000

Expedia 196.052 255.182 222.838 397.052 398.329 529.069 567.047 673.240 523.479 500.464

Hertz Global Holdings, Inc 592.535 887.016 1,041.67 1,101.30 1,317.54 631.241 444.825 865.124 971.237

TripAdvisor, Inc. 124.883 168.178 226.300 279.689

Orbitz, Inc. -18.858 -16.908 -48.000 -10.000 4.000 42.000 59.000 66.000 69.446 57.022

Industry Average 140.412 203.170 263.383 358.023 447.085 548.420 360.708 349.969 485.523 553.908

-200.000

0.000

200.000

400.000

600.000

800.000

1,000.000

1,200.000

1,400.000

1,600.000

Do

llars

(in

mill

ion

s)

EBIT

P a g e | 17

EBIT Growth 2002-2011 2006-2011 Notes

Priceline 89.745% 86.428%

Travel Zoo 42.167% 3.315%

Marriot International, Inc 2.267% -10.193%

Expedia 10.974% 4.671%

Hertz Global Holdings, Inc 6.372% -2.482% Hertz's data only dates back to 2003

TripAdvisor, Inc.

22.333% Trip Advisor's data only dates back to 2008

Orbitz, Inc -213.082% 70.136%

Industry Avg 20.910% 7.646%

P a g e | 18

c. Net Income Substantial increases also occurred after the acquisitions of Agoda.com in 2007 and Traveljigsaw

in 2010. Last year, it spiked $1.056 billion, far above its own history and competition.

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Priceline -19.184 11.916 31.509 192.729 74.466 157.082 185.624 489.472 527.541 1,056.37

Travel Zoo 0.853 2.050 6.037 7.963 16.803 9.109 5.913 6.418 13.157 3.319

Marriot International, Inc 439.000 476.000 594.000 668.000 712.000 697.000 359.000 -346.000 458.000 198.000

Expedia 76.713 111.407 126.272 228.730 244.934 295.864 -2,517.7 299.526 301.615 324.146

Hertz Global Holdings, Inc 158.615 365.471 349.977 115.943 264.559 -1,206.7 -126.022 -48.044 176.170

TripAdvisor, Inc. 72.371 102.427 138.776 177.677

Orbitz, Inc. -17.875 -16.029 -63.000 -388.000-146.000 -85.000 -299.000-337.000 -58.237 -37.277

Industry Average 95.901 123.993 176.715 176.567 169.691 223.102 -485.800 12.689 190.401 271.201

-3,000.000

-2,500.000

-2,000.000

-1,500.000

-1,000.000

-500.000

0.000

500.000

1,000.000

1,500.000

Do

llars

(in

mill

ion

s)

Net Income

P a g e | 19

d. Cash Flow From Operations CFO has also been increasing at a much faster rate than others. This shows that Priceline is able

to generate a good amount of cash through running its business, which ensures the company’s

ability to easily pay off its bills and invest in new expansion opportunities. A record high of

$1.342 billion was achieved last year.

Cash Flow Opers Growth 2002-2011 2006-2011 Notes

Priceline 127.747% 64.298%

Travel Zoo 39.744% -2.018%

Marriot International, Inc 8.653% 2.341%

Expedia 8.017% 7.890%

Hertz Global Holdings, Inc 2.046% -3.103% Hertz's data only dates back to 2003

TripAdvisor, Inc.

25.311% Trip Advisor's data only dates back to 2008

Orbitz, Inc 47.975% -6.517%

Industry Avg 22.228% 5.649%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Priceline 0.814 20.033 42.018 62.642 112.081 156.015 315.553 509.665 777.297 1,341.81

Travel Zoo 0.769 2.384 4.535 8.125 17.308 9.894 -3.325 5.125 23.925 15.631

Marriot International, Inc 516.000 421.000 891.000 837.000 970.000 778.000 641.000 868.000 1,151.00 1,089.00

Expedia 450.900 644.023 802.853 849.895 617.440 712.069 520.688 676.004 605.387 902.632

Hertz Global Holdings, Inc 1,899.32 2,251.38 1,449.99 2,614.56 3,089.48 2,095.50 1,774.99 2,208.67 2,233.33

TripAdvisor, Inc. 110.726 125.738 196.915 217.882

Orbitz, Inc. 3.463 35.135 -22.000 59.000 165.000 69.000 76.000 105.000 98.600 117.800

Industry Average 194.389 503.650 661.632 544.442 749.399 802.411 536.592 580.647 723.115 845.442

-500.000

0.000

500.000

1,000.000

1,500.000

2,000.000

2,500.000

3,000.000

3,500.000

Do

llars

(in

mill

ion

s)

Cash Flow from Operations

P a g e | 20

2. Profitability Margins a. Gross Margin

Priceline’s Gross Margin 2 has been trending upwards and reached a highest level of 62.6% last

year. It is lower than others because Priceline pays a good amount of stock-based

compensation, which reduces the numerator of the calculation, while competitors either list it

under other expenses, thus not affecting gross margin, or do not have it at all.

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

100.00%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Gross Margin

Priceline

Expedia Inc.

Orbitz Worldwide Inc.

Travelzoo Inc.

Industry Avg

P a g e | 21

b. Net Margin Priceline’s net margin has exceeded its major competitors since 2007. In 2011, it reached a

record high of 24.25%, which is more than two times that of Expedia and the industry average.

That shows that its revenues have been increasing much more quickly than its expenses.

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Priceline -1.912% 1.380% 3.446% 20.020% 6.630% 11.145% 9.848% 20.934% 17.101% 24.253%

Expedia Inc. 5.117% 4.761% 6.851% 10.792% 10.946% 11.100%-85.725%10.135% 9.942% 9.398%

Orbitz Worldwide Inc. -10.185% -6.628% -25.820%-56.560%-19.415% -9.895% -34.368%-45.664% -7.688% -4.861%

Travelzoo Inc. 8.663% 11.395% 17.926% 15.684% 24.168% 11.543% 7.317% 6.830% 11.666% 2.237%

Industry Avg 1.390% 3.144% 2.293% 0.068% 4.951% 5.384% -12.861% 2.340% 8.991% 8.950%

-100.000%

-80.000%

-60.000%

-40.000%

-20.000%

0.000%

20.000%

40.000%

Net Margin

P a g e | 22

c. ROE: Return on Equity represents how much profit a company generates with money its shareholders

have invested. Priceline’s ROE has been in the range of 33%-48% throughout the last five years,

beating competitors. The spike occurred in 2005, the year it acquired booking.com.

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Priceline 7.426% 17.227% 67.184% 20.216% 33.531% 29.051% 48.452% 33.655% 48.152%

Expedia Inc. 2.319% 1.868% 3.910% 4.209% 5.519% -70.462% 11.955% 11.264% 13.305%

Orbitz Worldwide Inc. -11.120% 0.000% 0.000% -13.613%-11.652%-50.850% -118.662 -36.415%-21.278%

Travelzoo Inc. 72.802% 27.378% 17.936% 39.374% 29.047% 25.342% 24.908% 34.326% 8.231%

Industry Avg 16.855% 15.369% 24.286% 13.213% 16.767% -16.068%-11.314% 14.856% 21.202%

-150.00%

-100.00%

-50.00%

0.00%

50.00%

100.00%

Return on Equity

P a g e | 23

d. ROA: ROA represents how efficient management is at using its assets to generate earnings. Priceline’s

ROA shows a pattern similar to that of ROE’s. It has been oscillating up and down since 2003,

but the last three years has been a relatively stable and high range from 22%-30.7%. Priceline’s

ROA compared to its competitors and industry average is favorable and has been hovering

above 20% in the last three years.

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Priceline 4.341% 7.162% 29.740% 8.008% 12.789% 13.940% 31.111% 22.258% 30.724%

Expedia Inc. 1.843% 1.356% 2.614% 3.058% 3.573% -35.487% 5.063% 4.790% 4.925%

Orbitz Worldwide Inc. -7.788% -57.028%-37.670% -6.994% -4.208% -17.013%-23.370% -4.639% -3.156%

Travelzoo Inc. 41.245% 24.171% 16.134% 33.881% 22.485% 16.149% 15.557% 23.376% 4.941%

Industry Avg 9.084% 9.907% 11.690% 7.844% 7.299% -4.156% 3.925% 10.332% 9.115%

-80.00%

-60.00%

-40.00%

-20.00%

0.00%

20.00%

40.00%

60.00%

Return on Assets

P a g e | 24

3. Short-term Liquidity a. Current Ratio

The current ratio gives us an idea of the company’s ability to pay back its short-term liabilities

with short-term assets. 2007 and 2011 each witnessed a major decline. Priceline’s assets have

been increasing by substantial amounts. From 2010 to 2011, total current assets rose by

approximately $1 billion, a 50% jump. So the decrease was due to a large long-term debt

(convertible debt) becoming due in these two years.

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Priceline 2.596 5.714 3.664 3.150 4.997 0.882 1.259 2.503 4.154 2.773

Expedia Inc. 2.036 0.709 0.410 0.840 0.589 0.765 0.668 0.901 0.891

Orbitz Worldwide Inc. 4.220 3.884 0.000 0.294 0.408 0.287 0.332 0.403 0.446 0.487

Travelzoo Inc. Inc. 1.925 2.199 14.365 7.957 6.301 3.606 2.423 3.257 3.173 1.956

Industry Avg 2.383 2.906 4.032 2.222 2.442 1.202 1.122 1.294 1.696 1.325

0.000

2.000

4.000

6.000

8.000

10.000

12.000

14.000

16.000

Current Ratio

P a g e | 25

b. Quick Ratio 2 The quick ratio measures a company’s ability to meet its short-term obligations with its most

liquid short-term assets (cash, short term investments and receivables). Priceline’s quick ratio 2

mirrors the pattern of current ratio. It has maintained a relatively high level above 1 since 2008.

This gives the Priceline the flexibility in meeting its short term liabilities. The declines in 2007

and 2010 were due to same reason as that of the current ratio.

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Priceline 2.499 5.618 3.576 2.893 4.793 0.835 1.184 2.251 3.875 2.646

Expedia Inc. 1.969 0.687 0.344 0.767 0.511 0.657 0.551 0.742 0.664



Industry Avg 2.179 2.783 3.887 2.025 2.165 0.980 0.879 1.083 1.475 1.206

0.000

2.000

4.000

6.000

8.000

10.000

12.000

14.000

16.000

Quick Ratio 2

P a g e | 26

4. Long-term Solvency a. Long-term Debt-to-Equity

Priceline has an exceptionally low long-term debt-to-equity ratio, nearly zero in 2011, after a

large portion of its outstanding long-term debt that is nearing its maturity. That explains it

having very little interest expense. So the TIE ratio is not of great concern to us.

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Priceline 0.000 0.766 1.056 0.584 1.571 0.000 0.107 0.027 0.263 0.030

Expedia Inc. 0.000 0.000 0.000 0.000 0.085 0.225 0.663 0.334 0.467 0.568



Industry Avg 0.087 0.226 0.613 0.731 1.173 0.975 1.550 1.386 1.124 0.774

0.000

0.500

1.000

1.500

2.000

2.500

3.000

3.500

4.000

4.500

5.000

Long-Term Debt to Equity

P a g e | 27

b. Financial Leverage Financial Leverage has been on the fall over the years. Priceline uses significantly less leverage

than its competitors. This also is shown with Priceline’s low amount of debt issued in the last

ten years. In the last three year, Priceline’s financial leverage seems to be stabilizing at around a

1.55.

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Priceline 1.784 2.345 2.178 2.498 2.610 2.084 1.557 1.512 1.567

Expedia Inc. 1.258 1.378 1.496 1.377 1.544 1.986 2.361 2.352 2.701

Orbitz Worldwide Inc. 1.324 1.364 1.447 1.946 2.769 2.989 5.077 7.850 6.743

Travelzoo Inc. Inc. 1.765 1.133 1.112 1.162 1.292 1.569 1.601 1.468 1.666

Industry Avg 1.671 1.754 2.790 2.967 3.307 3.928 4.073 4.201 5.991

0

1

2

3

4

5

6

7

8

9

Financial Leverage

P a g e | 28

5. Operating Efficiency a. Asset Turnover

Priceline’s asset turnover has declined from 2002 to 2007 but has since remained quite flat, only

lower than Travelzoo. This is consistent with the fact that both its sales and assets have been

growing considerably in the last few years. This turnover ratio is basically saying that for every

one dollar of assets, Priceline has been able to generate more than one dollar. In this regard,

Priceline seems to be efficient.

2003 2004 2005 2006 2007 2008 2009 2010 2011

Priceline 3.147 2.078 1.485 1.208 1.147 1.415 1.486 1.302 1.267

Expedia Inc. 0.387 0.198 0.242 0.279 0.322 0.414 0.500 0.482 0.524



Industry Avg 1.885 1.201 0.913 0.851 0.957 1.068 1.079 0.991 1.079

0.000

0.500

1.000

1.500

2.000

2.500

3.000

3.500

4.000

Asset Turnover

P a g e | 29

b. Receivables Turnover Receivables turnover mirrors the pattern of asset turnover, declining at first then stabilized at

slightly above 20, but higher than all its competitors. Given the considerable growth in sales,

Priceline has been effective in collecting its receivables.

2003 2004 2005 2006 2007 2008 2009 2010 2011

Priceline 70.740 62.852 39.815 28.585 23.638 23.121 22.165 21.950 20.407

Expedia Inc. 1.346 1.933 11.610 10.995 10.864 10.260 10.377 11.211



Industry Avg 28.793 21.613 13.434 13.366 12.530 11.851 12.642 12.761 11.616

0.00010.00020.00030.00040.00050.00060.00070.00080.000

Recievables Turnover

P a g e | 30

6. DuPont Analysis The DuPont Analysis, by decomposing ROE into three component ratios, provides further insight into the

ROE.

Return on Equity

= Net Profit Margin

* Asset Turnover

* Financial Leverage

2009 48.452% = 20.934% * 1.486 * 1.557 2010 33.655% = 17.101% * 1.302 * 1.512 2011 48.152% = 24.253% * 1.267 * 1.567

Priceline’s ROE decreased by about 15% from 2009 to 2010, but then increased back to the 48% level in

2011. Asset Turnover has slightly decreased, which does not contribute much to the ROE changes.

Financial Leverage is almost the same for all three years. So the main driver of the changes in ROE is net

profit margin. It fell by nearly 4% from 2009 to 2010 and increased by about 7% the next year, as result

of a greater increase in sales than in expenses.

P a g e | 31

V. Pro Forma Income Statement When constructing our forecast of Priceline’s market share for 2013, we chose to use a Peer Industry

Group. We had constructed our Peer Industry group with companies that offer the same service as

Priceline. The travel online retail booking companies in the Peer Industry Group included Travel Zoo,

Orbitz Inc., Expedia, Trip Advisor, and HomeAway. These companies are closely related to Priceline in

terms of operations and services. Our Peer Industry group also included two key companies that played

a strong role in determining the direction in the travel industry. These companies included Hertz Global

Holding Inc. and Marriot International Inc. These two companies were used to give a stronger indicator

in our market share forecast because the online retail booking industry is highly dependent on the travel

industry, such as Hotels, Rental Cars, Airlines and Cruises.

Next we needed to forecast 2012 and 2013 market share for Priceline in order to get its revenue number

for the next two years. First we took the market share of each online booking company by taking their

historical revenue and dividing it by the total revenue of our entire Peer Industry Group. We noticed

that Priceline had a strong growth increase in market share during every year since 2005. Another

interesting observation was that Priceline had sustained a market share between 2.95 to 1.5% annual

2003 2004 2005 2006 2007 2008 2009 2010 2011

Priceline 4.69% 4.62% 4.22% 4.63% 5.28% 6.84% 9.50% 11.47% 14.42%

Travel Zoo 0.10% 0.17% 0.22% 0.29% 0.30% 0.29% 0.38% 0.42% 0.49%

Expedia 12.71% 9.30% 9.28% 9.23% 9.99% 10.66% 12.01% 11.28% 11.42%

TripAdvisor, Inc. 1.08% 1.43% 1.80% 2.11%

Orbitz, Inc. 1.31% 1.23% 3.00% 3.10% 3.22% 3.16% 3.00% 2.82% 2.54%

Homeaway 0.84% 0.68% 0.45% 0.27%

Total Internet Booking 18.81% 15.32% 16.72% 17.26% 18.78% 22.87% 27.01% 28.23% 31.25%

Market Share Growth 4.69% -0.08% -0.40% 0.42% 0.65% 1.56% 2.66% 1.97% 2.95%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

Market Share

P a g e | 32

growths in the last four years. We also noticed many of their direct competitors could not keep up with

Priceline’s growth and only had a near 0 to 1% annual growth rate in recent years. These observations

led us to believe that in the near future Priceline would continue to sustain a strong market share

growth and may be capable of stealing market share from other direct competitors. After doing further

research into Priceline’s expansion in international markets such as China, South America and Europe,

and other recent news listed in the previous sections; we decided to make a growth estimate of 3% for

each year from 2012 to 2013. Then we used our market share growth estimate to obtain our revenue

numbers for the 2012 and 2013 fiscal year. The forecasted Peer Industry Total except Priceline was

estimates taken from FactSet. Our 2012 projected revenue is $5,589,555,420 and our 2013 projected

revenue is $7,345,537,862.

Market Share Forecast (2012 & 2013)

E(2013)

E(2

01

2)

1% 2% 3% 4%

1% 16.42% 17.42% 18.42% 19.42%

2% 17.42% 18.42% 19.42% 20.42%

3% 18.42% 19.42% 20.42% 21.42%

4% 19.42% 20.42% 21.42% 22.42%

P a g e | 33

Revenues: Based on Priceline’s 10K report, their revenues are broken up into three components:

Merchant Revenues, Agency Revenues, Other Revenues. According to their mangement report in their

10K, Priceline is looking to increase their agency revenue at a higher pace than their merchant revenues

because of the higher cost in their merchant services compared to agency revenues. Therefore we

calculated the merchants revenue to decrease by 6.9 points of percent of revenue in the 2012 and 2013

year while we had the angency revenue increase by the same amount of points of percent of revenue.

The other revenues were calculated as a constant percent of revenue. Our 2012 and 2013 forecast look

like:

P a g e | 34

2012 2013

Merchant Revenues 2,186.8 2,367.1 Agency Revenues 3,387.5 4,958.3 Other Revenues 15.3 20.1 Total Revenues 5589.555 7345.538

Cost of Revenues: Priceline’s cost of revenues is based mainly on their merchant revenues so in order to

forecast the next two years we took into account the percent of cost of revenues from its merchants

revenues and took a conservative decrease in cost of revenues in a 25% in 2012 and 22% in 2013 (% of

total revenues).

Total Operating Expenses: On this item we decided to divide their operating expenses from the

components on their 10K statement, in order to get a better picture in were their expenses are headed.

Their online advertising expenses seem to trend upward leading us to believe that in 2012 it will

increase to 23% of revenues and in 2013 it will increase to 25% of revenues. Their offline advertising

gives a slight decrease every year. We forecast it to have a .60% of revenues in 2012 and a .40% of

revenues in 2013. Priceline has spent a good portion in sales and marketing at around a three to four

percent of revenues. This led us to a forecast of 3.66% in 2012 and a 3.72% in 2013. Personnel

expenses includes stock based compensation given to employees leading to a pretty constant number of

around seven to nine percent of revenue. We gave a moderate forecast of 8.18% in 2012 and 8.34% in

2013 which is derived from the lagging three year average. General and administrative had a constant

number of 2.5 to three percent of revenue. Information technologyseems to be decreasing at a slow

pace from .98% to .78% of revenue which helped us come out with a forecast of .76% for 2012 and .74%

for 2013. This forecast assumes that information technology expense will decrease by .02% of revenue.

Depreciation and amortization were forecasted to remain unchanged from its 2011 level.

P a g e | 35

Nonoperating Income: On this item we took a look at Priceline’s cash and short term investments and

other long term investments. We notice that the growth rate of its cash and short term investments

were moving at forward rate. We forecasted this rate to be 60% for both 2012 and 2013. The long term

investments were projected to be zero. We also project interest rates for pricelines investments to be

.5% in 2012 and a .52 in 2013, based on a historical growth in the last three years. These observations

gave us an projected number in interest income forecasts in 2012 to be 13.307 and 22.143 in 2013. The

Total Nonoperating Income numbers were forecasted as 6.53 and 15.37 for 2012 and 2013, respectively.

Interest Expense: We came up with our interest expense forecast by looking at Priceline’s issued debt.

We found that they had three outstanding issues: 31 million at a 0.75% rate retiring in 2013, 575 million

at a 1.250% rate retiring in 2015, and a 1,000 million at a 1.0% rate retriring in 2018. This led our

forecast to be 12.42 in 2012 and 17.42 in 2013.

Income Taxes: This line was forecasted by looking at previous tax rates. Since Priceline does a lot of its

business internationaly we figured we should take a convservative view on their tax rates to account any

unpredictable tax hikes. In 2012 we forecasted Priceline to have a 28.152% tax rate and in 2013 to have

the same tax.

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Minority Interest Expense: We did not have sufficent information to forecast this line, so we decided to

take the last two year average which brought both our 2012 and 2013 estimate to 1.7 million.

Net Income: (in thousands)

2012 2013

1,460,885 2,083,883

Weighted Average Diluted Shares: Three factors that we took account in our amount of shares

estimate was the issuing of convertible notes, stock based compensation under personell, and a

statement from Priceline to issue bonds for a repurchasement program. We decided to keep an

increase in the amount of shares based on last year’s increase giving us an estimate of around 51 million

shares in 2012 and around 52 million shares in 2013.

EPS:

2012 2013

28.403 40.341

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VI. Relative Valuation The relative valuation model allows for priceline.com to be compared to its index, industry and

competitors. The competitors consisted of Travel Zoo, Marriot International, Inc., Expedia, Inc., Hertz Global Holdings, Inc., Trip Advisor, Inc., Orbitz, Inc., HomeAway, Inc., eBay, Inc., and we used the S&P 500 Consumer Discretionary sector as an index. These competitors composed our custom industry, referred to as “industry average.” In order to establish priceline.com’s price estimate, three factors were considered in the calculation: priceline.com’s estimated EPS for 2013, forward P/E ratios for our comparables’ universe for 2013, and an adjustment factor derived from historical relationships between the P/E for priceline.com and the P/E’s for the aforementioned benchmarks, shown below.

22003

22004 2005 2006 2007 2008 2009 2010 2011

PCLN/TZOO 0

.762 0

.107

.108 .875 1.399

.576 .746 .184

PCLN/MAR 2

.784 1

.222 .229 .903 1.720 1.002

1.124 .427

PCLN/EXPE

.144 .

866 .998

.885 2.254 2.664

PCLN/HTZ

.717 1.712

.774

PCLN/TRIP

1.187

PCLN/OWW

PCLN/AWAY

PCLN/EBAY 0

.698 0

.304 .096 .682 .253 1.918 1.719 1.886 1.839

PCLN/INDUSTRY AVG

1.123

0.269 .186 .862 1.288 1.001 .776 1.089 .532

PCLN/S&P 500 Consumer Discretionary(Sector)

2.807

1.514 .270 1.353 1.722 .613 1.031 2.377 1.529

The adjustment factor aims to indicate a forecast of the future relationship between

priceline.com and the comparables universe and acts as a bridge between our 2013 E(EPSPCLN). To derive adjustment factors, we carefully analyzed the historical P/E relationships, trying to recognize the development of trends that might forecast how the ratios will look in the future, relatively speaking. Challenges arose because of insufficiently consistent data. For example, Orbitz Worldwide never had a P/E relationship itself because of negative earnings; similarly, HomeAway only recently went public, and in its first year trading as a public company, it suffered a net loss. To sure up the data, we added the index and eBay to the list of our comparables. The chart below shows the historical mean and historical medians for the relationship, along with the two adjustment factors.

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Past mean Past median Adjustment Factor 1

Adjustment Factor 2

PCLN/TZOO 0.595 0.661 0.63 0.133

PCLN/MAR 1.176 1.063 1.15 1.15

PCLN/EXPE 1.302 0.942 1.8 2.459

PCLN/HTZ 1.067 0.774 1.067 1.067

PCLN/TRIP 1.187 1.187 1.187 1.187

PCLN/OWW

PCLN/AWAY

PCLN/EBAY

1.044 0.698 1.044 1.841

PCLN/INDUSTRY AVG 0.792 0.862 0.925 0.925

PCLN/S&P 500 Consumer Discretionary(Sector) 1.468 1.514 1.5 1.5

Because the data was not always consistent, we decided to create two adjustment factors for

each comparable company. The first adjustment factor is based off of the statistical data for the entire history, but the second, however, acknowledges an alternative relationship that can be seen elsewhere. For example, in the case of Expedia and eBay, the recent data exhibits a newer trend, one outside of the historical mean and median. In the case of Travel Zoo, the second adjustment factor considers the occurrence of a P/E relationship between .107 and .184 in three separate years, one year being 2011. In the cases where we were confident in the analysis that brought us to the first adjustment factor, we used it for the second adjustment factor, too. To calculate current price estimates, we multiplied the 2013 forward P/E for each company in the comparables universe and the index by the first adjustment factor in one example and the second adjustment factor in another example. Next, we multiplied this number by our E(EPSPCLN) which we forecasted in our income statement above and shown in the table below

. Consensus from FactSet

Our Forecast

FY1 FY2 FY1 FY2

PCLN E(EPS) 31.64 39.26 28.40 40.34

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The two EPS numbers titled, “Consensus from Factset,” consists of the average EPS estimate for all of the analysts’ data collected on FactSet. Having two adjustment factors gave us two price estimates for each company and the index, shown below.

"Current" Price using forward P/E (Adj Factor 1)

"Current" Price using forward P/E (Adj Factor 2)

PCLN/TZOO $376.39 $79.71

PCLN/MAR $910.68 $910.68

PCLN/EXPE $743.57 $1,015.81

PCLN/HTZ $437.76 $437.76

PCLN/TRIP n/a n/a

PCLN/OWW n/a n/a

PCLN/AWAY n/a n/a

PCLN/EBAY $712.18 $1,255.69

PCLN/INDUSTRY AVG $659.46 $659.46

PCLN/S&P 500 Consumer Discretionary(Sector) $807.83 $807.83

After taking the average of all of the price estimates, we compared it to the current price that priceline.com is trading at, as of 4/26/2012.

Current Stock Price Our Estimated Current Price

$733.27 $701.06

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VII. Absolute Valuation The third leg of our quantitative analysis is the absolute valuation. Since priceline.com has a

relatively small amount of debt and will pay off that debt by 2013, the free cash flow to equity model was decided to be the best method in performing the valuation. The first step of the process involves calculating the firm’s cost of capital, kFCFE. We used the capital asset pricing model, CAPM, to calculate kFCFE. The table below outlines the inputs used in the CAPM formula, and the costs of capital that were produced, using the following formula:

CAPM formula: K = Risk-free Rate + Beta * (Expected Market Return – Risk-free Rate)

Average Adj Beta(5 and 10 years) 1.317

10 year Adj Beta (dates) 1.503

Risk free Rate 3.4167%

Market Risk Premium 7.339%

Expected Market Return 10.816%

K (cost of capital) - using average of Adj β for 10 and 5 years 13.157%

K (cost of capital) - using 10 yr Adj β 14.537%

30-year Treasury STRIP rate 3.4167%

10-year Treasury STRIP rate 2.2792%

The risk-free rate used in the CAPM calculation is the thirty-year STRIP rate. We used two betas

to calculate two costs of capital. The first beta is the average of ten-year and five-year adjusted betas and the second beta used was the ten-year adjusted beta. All beta statistics were calculated using technology from Bloomberg and are calculated on a monthly basis relative to the S&P 500. The market risk premium was also calculated using Bloomberg.

The next step involved calculating the FCFE from 2002-2011, where we started with net income for a given year and adjusted for non-cash expenses, changes in working capital, capital expenditures, and net new borrowing. Four average annual growth rates of FCFE using a geometric average calculation were found:

Geometric Average

9 years 8 years 5 years 4 years

32.239% 38.111% 23.855% 74.365%

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We then used these rates to set a context for short-term growth rates with which we grew out

the free cash flow to equity from 2011 out to 2017. We used growth rates of 10%, 15%, 20%, 25%, and 30%. To add a more conservative dimension to these two high growth rates, we also set up scenarios with two short term growth rates, named g1 and g2. g1 was used to grow the cash flows for the first 3 years, 2012-2014, and g2 was used for the second three years, from 2015-2017. We then discounted these projected cash flows using both of the kFCFE’s.

Next, we had to forecast growth out past 2017 in order to generate a terminal value. Different growth rates were used in a scenario analysis to address this issue. Multiple growth rates, ranging from 1% to 9%, were applied to the 2017 free cash flows to equity. Then, we used the constant growth valuation model to determine the PV at 2017 of all post-2017 cash flows, and then discounted those back to 2012. In one analysis, these were discounted back using our discount rate of 13.16% and in another we used our second discount rate, 14.54%. Finally, we added the terminal value to the sum of the short-term present values in order to get the value of all the future cash flows. Dividing this by a forecast of diluted shares outstanding, we come to our estimates of intrinsic value.

Scenario Analysis, k=13.16%

g=10% g=15% g=20% g1=25% g2=15%

g1=30% g2=20% g=25% g=30%

.01 354.65 441.63 547.52 558.42 687.31 675.65 829.71

.02 374.70 467.81 581.31 592.04 730.27 718.83 884.35

.03 398.70 499.15 621.76 632.28 781.70 770.51 949.75

.04 427.94 537.32 671.05 681.31 844.36 833.48 1029.42

.05 464.35 584.86 732.42 742.35 922.39 911.89 1128.64

.06 510.93 645.68 810.93 820.46 1022.22 1012.22 1255.58

.07 572.65 726.26 914.95 923.94 1154.47 1145.12 1423.75

.08 658.29 838.08 1059.31 1067.55 1338.00 1329.58 1657.15

.09 785.14 1003.70 1273.11 1280.23 1609.83 1602.78 2002.83

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Scenario Analysis, k=14.54%

g=10% g=15% g=20% g1=25% g2=15%

g1=30% g2=20% g=25% g=30%

..01 319.31 395.83 488.76 499.63 612.64 600.97 735.68

..02 334.58 415.76 514.49 525.23 645.36 633.84 777.28

..03 352.49 439.15 544.69 555.26 683.74 672.42 826.08

..04 373.80 466.98 580.61 591.00 729.42 718.31 884.15

..05 399.59 500.64 624.07 634.23 784.67 773.83 954.40

..06 431.41 542.19 677.70 687.59 852.86 842.35 1041.10

..07 471.67 594.76 745.57 755.10 939.15 929.06 1150.81

..08 524.26 663.42 834.21 843.28 1051.84 1042.29 1294.09

..09 595.84 756.88 954.85 963.29 1205.23 1196.42 1489.11

Our scenario analysis has been conditionally formatted so that the values above the company’s current stock price, 733.27, are highlighted in green. The growth rates that coordinate with the green cells depict the growth rates that the company would need to achieve in order for the purchase of the stock to be a successful “buy.” More specifically, if priceline.com can continue growing at an average of 25% a year, it would only necessitate a long term growth rate of 3% for the stock to be worth purchasing. We feel that its historical rates of growth as well as the recent news on the company will allow for it to exceed these growth rates and add value to our portfolio. The second scenario, with a k of 14.54% gives a less favorable outlook for the stock, but one that still suggests it would be worth buying. Looking again at the 25% near-term growth rate, priceline.com would need to sustain a 5% growth rate in its FCFE to be worth buying. We do think that a cost of capital closer to 13.16% is more reasonable for the company but thought it necessary to calculate a second k and run the scenario accordingly. The fact that it still has merit in buying the stock, we were reassured in our recommendation.

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VIII. Risk Factors To fairly assess the equity, we must analyze business-specific and industry-specific risk as

outlined in the 10-K form of the Annual Report. Priceline.com has historically exhibited volatile tendencies. 14 The most basic reason for this

stems from its heavy reliance on the rest of the travel industry. The travel industry, as with the rest of the consumer discretionary sector, relies on a healthy economy to drive consumer spending. If the economy does not rebound as well as we expect it to, it could adversely affect priceline.com’s growth.15 Furthermore, the worldwide recession has decreased hotel occupancy and average daily rates (ADRs), factors which “generally have…a negative effect on our gross profit.”16

The online reservation industry consists of several strong competitors continuously vying for power, and now new threats from external competition have arisen. Current competitors have developed “opaque” hotel services, a type of service that priceline.com has always been an industry leader. Opaque pricing, such as with priceline.com’s Name Your Own Price booking service, the price is not disclosed until after purchase. Expedia has created a system referred to as “Expedia Unpublished Rates,” and Travelocity also offers a similar program. If these companies continue to develop these services, it could cut into priceline.com’s market share.17

The threat of competition is coming directly from suppliers now, too. Hotels have enacted initiatives which can potentially cut into the company’s revenue. Fundamentally, more and more hotels offer online reservations, a service that decreases priceline.com’s margins. The development of a search engine called Room Key allows hotel companies such as Hilton Worldwide, Marriott, and Choice Hotels International try to drive demand to their own websites to decrease the share that online reservation systems receive. Furthermore, hotel rooms are increasingly being offered through websites such as Groupon and Living Social, who offered daily discounts on rooms. If consumers begin viewing these as a way to save on travel, that could cut into priceline.com’s revenue.18

Another new risk involves the search engines that direct consumers to priceline.com’s website. Google has launched “Hotel Finder” and Microsoft has launched Bing Travel, two search engines whose competition poses a direct risk to priceline.com’s profitability. Priceline.com is also affected by any changes major search engines could make to their algorithms, in which case priceline.com might receive less traffic on priceline.com’s website.19

Priceline.com’s revenue include international operations from its foreign-based companies such as Booking.com, Agoda.com, and rentalcars.com. International transactions pose the currency exchange risk, especially given the economic climate in Europe.20 “Sovereign debt issues in the European Union could lead to further significant…devaluation of the Euro against the U.S. Dollar, which would adversely

14 "Priceline.com Incorporated - Annual Report." Pg 16 15 "Priceline.com Incorporated - Annual Report." Pg 10 16 "Priceline.com Incorporated - Annual Report." Pg 13 17 "Priceline.com Incorporated - Annual Report." Pg 12 18 "Priceline.com Incorporated - Annual Report." Pg 12 19 "Priceline.com Incorporated - Annual Report." Pg 12 20 "Priceline.com Incorporated - Annual Report." Pg 11

P a g e | 44

impact our Euro-denominated net assets… and net income as expressed in U.S. Dollars.”21 Maintaining brand image and volume of users requires much online advertising, already the largest expense.22 Because international operations are growing rapidly and they require a higher percentage of priceline.com’s EBIT for online advertising the risk of increasing costs is a legitimate one.23

Certain changes in tax policy could negatively affect priceline.com’s bottom line. One example involves the Netherlands and its corporate tax rate. Because Booking.com currently has income “generated from qualifying ‘innovative’ activities,”24 a portion of Booking.com’s earnings have been taxed at a 5% rate instead of 25%. At the end of December 2013, Booking.com will again have to be verified to participate in the Innovation Box Tax. Another tax issue involves litigation brought against priceline.com and other online travel agencies which found the company’s relationship with hotels to be one which would make priceline.com liable to pay hotel occupancy tax. If an unfavorable outcome arises, it could lead to higher costs both directly related to the tax and due to more litigation which could follow.25 The company also has $1.6 billion in cash outside the U.S. which would be subject to certain taxes if management finds it necessary to repatriate the funds to the U.S. to invest.26

Priceline.com’s business organization as an online tech company puts the company at a security

risk. Advancements in hacker technology make priceline.com susceptible to identity theft.27 Similarly, if priceline.com’s website fails to remain operational for an extended period of time, priceline.com may lose out on sales. Priceline.com has technological risks from priceline.com’s own software, but also from the reliance on certain third-party servers. More specifically, there exists a danger in reliance on third-parties to process priceline.com’s credit card transactions.28

21 "Priceline.com Incorporated - Annual Report." Pg 10 22 "Priceline.com Incorporated - Annual Report." Pg 20 23 "Priceline.com Incorporated - Annual Report." Pg 14 24 "Priceline.com Incorporated - Annual Report." Pg 17 25 "Priceline.com Incorporated - Annual Report." Pg 14 26 "Priceline.com Incorporated - Annual Report." Pg 21 27 "Priceline.com Incorporated - Annual Report." Pgs 15-16 28 "Priceline.com Incorporated - Annual Report." Pg 18

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